Different Sources of International Financing are:
1. Commercial Banks:
They are an important source of financing non-trade international operations. The types of loans and services provided by banks vary from country to country.
2. International Agencies and Development Banks:
A number of international agencies and development banks have been set up over the years to finance international trade and business by providing long- and medium-term loans and grants to promote the development of economically backward areas in the world. The main among them include International Finance Corporation (IFC), EXIM Bank and Asian Development Bank.
3. International Capital Markets:
Prominent international financial instruments used for International Financing, by various companies are:
1. GLOBAL DEPOSITORY RECEIPTS (GDRs):
When the local currency shares of a company are delivered to the depository bank, that bank issues depository receipt to the depositor against shares, these receipts expressed in US dollars are caller GDRs.
Many Indian companies such as Infosys, Reliance, Wipro and ICICI have raised money through issue of GDRs.
Features of GDR:
1. GDR can be listed and traded on a stock exchange of any foreign country other than America.
2. It is negotiable instrument.
3. A holder of GDR can convert it into the shares.
4. Holder gets dividends.
5. Holder does not have voting rights.
2. AMERICAN DEPOSITORY RECEIPTS (ADR):
The depository receipt issued by a company in USA is known as ADR.
Feature of ADR: -
1. It can be issued only to American Citizens.
2. It can be listed and traded is American stock exchange.
3. Indian companies such as Infosys, Reliance issued ADR.
3. FOREIGN CURRENCY CONVERTIBLE BONDS (FCCBs):
Foreign currency convertible bonds are equity linked debt securities that are to be converted into equity or depository receipts or retained as bonds, after a specific period.
The FCCBs are issued in a foreign currency and carry a fixed interest rate. These are listed and traded in foreign stock exchange and similar to the debenture.
INDIAN DEPOSITORY RECEIPTS (IDRs)
IDRs are like GDR or ADR except that the issuer is a foreign company raising funds from Indian Market. IDRs are rupee dominated. They can be listed on any Indian stock Exchange.
‘Standard Chartered PLC’ was the first company that issued Indian Depository Receipt in Indian securities market in June 2010.
Issue Procedure of IDRs
1. Firstly, a Foreign Co. hands over the shares to Overseas Custodian Bank (OCB). It requires approval from Finance Ministry to act as a custodian.
2. The Overseas Custodian Bank (OCB) requests Indian Depository (ID) to issue shares in the form of IDR.
3. The Indian Depository (ID) converts the issue which are in foreign currency into IDR and into Indian rupee.
4. Lastly, the Indian Depository (ID) issues IDRs to intending investors.
Features of IDRs
1. IDRs are issued by any foreign company.
2. The IDRs can be listed on any Indian stock exchange.
3. A single IDR can represent more than one share, such as one IDR = 10 shares.
4. The holders of IDR have no right to vote in the company.
5. The IDRs are in rupee denomination.
Advantages of IDR
1. It provides an investment opportunity to Indian Investors.
2. It fulfils the capital need of foreign companies.
3. It provides listing facility to foreign companies to list on Indian Capital Market.
INTER-CORPORATE DEPOSITS (ICDs):
Inter-Corporate Deposits are unsecured short-term deposits made by one company with another company. These deposits involve brokers. The rate of interest on these deposits is higher than that of banks and other markets. The biggest advantage of ICDs is that the transaction is free from legal issues.
Type of ICDs:
1. Three Months Deposits
The most popular type of ICDs, are generally considered by borrowers to solve problems of short-term capital adequacy. The rate of interest for these deposits is around 12% p.a.
2. Six months Deposits
The rate of interest for these deposits is around 15% p.a.
3. Call deposits
This deposit can be withdrawn by the lender on a day’s notice. The rate of interest on call deposits is around 10% p.a.
Features of ICDs
1. These transactions take place between two companies.
2. These are short term deposits.
3. These are unsecured deposits.
4. These transactions are generally completed through brokers.
5. These deposits have no organised market.
6. These deposits have no legal formalities.
7. These are risky deposits from the point of view of lenders.
Sources of Business Finance MCQs